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Wednesday, July 25, 2012

Short Alnylam

Biotech shorts and event traders rejoice. The Tekmira-Alnylam litigation is coming
close to a jury trial. This opens up a
few interesting trading opportunities.

As evidenced alone by Alnylam’s
delay and cost-intensifying tactics in both the main litigation with Tekmira
and the VSP patent interference, Alnylam’s views its strong balance
sheet and market capitalization (arguably partly built on the back of Tekmira) key
advantages in their alleged attempt to misappropriate SNALP technology from
Tekmira. Why sweat the
merits of a case when you think that you can financially outlast your opponent?

At the same time, following a number
of positive clinical results, enabled by the contested technology no less, Alnylam
the stock has soared over 200% in less than a year. But as the big showdown with Tekmira approaches (at the end of October in front of a jury) the stock has become a near-perfect
short.

Here is why.

First of all, there seems to be little risk of a catalyst ahead of this key event which could significantly jolt the stock to the upside. This is because the clinical results with the SNALP-based drug candidates have been reported (ALN-TTR01, ALN-TTR02, ALN-PCS02) and Alnylam will not be able, in light of the
Tekmira litigation, close any meaningful product-based partnership, much
less close a platform-baseddeal for
any upfront that would move the needle of this billion
dollar market cap company.

The recent run-up in the stock,
the early-stage pipeline plus the absence of catalysts make the stock an
attractive short based on technicals alone. A
simple analyst downgrade which may come any day could easily knock down the
stock by a double digit percentage. The big short opportunity, however, lies in the increasing likelihood that Alnylam
has no choice but to settle the legal matter as the judges in both cases are getting visibly annoyed by Alnylam’s tactical games. For example in the VSP patent interference, Alnylam got
reprimanded for filing motions belatedly and manipulating history by adding
claims to an ex parte patent
applications; or in the words of the judge in the main litigation: ‘I conclude that the proposed motions are not
only unlikely to eliminate any issues but they would at the same time be
extremely costly for the parties to litigate and distract them from preparing
for and focusing the issues for trial.'

In fact, I am surprised by how
well the judges have picked up on Alnylam’s smugness with all of the
important decisions in both cases so far going in Tekmira’s favor. Note that I did not
expect this for the VSP Interference where I had seen the situation
more balanced before Alnylam and their lawyers bungled the case. Unless the bitterness of the dispute has led
Alnylam’s management to actually believe in their case, settling the matter ahead of the trial would
seem a foregone conclusion.

Lose, lose big; win, get your money back

A settlement, of course, is likely
to be expensive to Alnylam and should pressure the stock as it should consume a
good part of their $300M+ cash position. Tekmira is asking for a billion dollar in
compensation, a number that sounds outlandish at first glance, but maybe not so
considering that Alnylam has earned over half a billion in non-dilutive
partnership funding which would have been impossible without Tekmira’s
technology.

Even assuming the best outcome for Alnylam, namely an outright win at the trial, this would be unlikely to have much of a positive
effect on the stock at current valuations (~$18.6/share). In fact, there may be a sell-on-the-news as
this legal uncertainty disappears and the biotech analysts/stock market have largely disregarded the Tekmira litigation in their estimates.

And if it comes to trial and
Alnylam loses, well, this could get real ugly for the stock. But again, I do not believe that Alnylam
management and BoD wish to expose themselves to the inevitable shareholder
class action lawsuits that would surely follow and therefore settle.

Tekmira Long as an Alternative

With a market cap of merely $30-40M
and a potential, if not likely, multimillion dollar windfall, a Tekmira long would
be the obvious trading alternative. If they lose the trial and technology, it
would likely destroy the company through endless rounds of dilutions at low
share prices. Consequently, unlike you
are me and strongly believe in the merits of the case and have held the stock for close to four years now, I would not hold an
outsized Tekmira long position relative to your personal wealth based on the
simple mathematical rule that anything multiplied by zero equals zero. The anemic trading volumes in the stock would
also argue against taking a large position, although a slow accumulation
strategy and strong trading volumes on the event may allow for that.

Addendum: It would seem that Alnylam management agrees with the above short thesis. The company's CSO and CFO were quick to act by exercising options and selling the respective shares on the recent ALN-TTR02 data spike. The CSO made around 350K in profits, the CFO around 100K.

Disclaimer: The above is my personal opinion only. If you intend to trade stocks based on the account above, it is entirely at your own risk.

11 comments:

Anonymous
said...

Are you becoming a little fixated here Dirk?If you ask Alnylam they will give you a very different assessment.You used to have a really interesting balanced site but it all seems to have become a bit repetitive.Of course you might be right.Are you not worried you're losing the plot? You're an acedemic in the middle of no where.

It is my opinion that Dirk allowed for an Alnylam victory in court and fairly assumes they will settle in everyone's best interest. He is simply recommending you consider shorting their shares. If you disagree, then by all means please go long Alnylam. That is what makes a market. My opinion? I simply hope the guilty party has their asses handed to them in court if they cannot admit in private their wrongdoing and settle this thing.

experiencedmentor your answer is bizarre.Let the world realise you're as mad as Dirk.You're saying Dirk is assuming an Alnylam victory,it will be in the best interests of everyone and yet short the shares-when we have just witnessed the most important single event in the history of RNAi,presenting itself as a +50% rise in Alnylam shares.

I’ve read your blog and all the posts regularly for over three years. Your commentaries and reports have been insightful, informative and even entertaining. You make no pretense of your biases regarding the the ongoing legal issues between Tekmira and Alnylam. I have a few comments for the offering.

On balance, John Maraganore is (or at least, was) a good CEO. He is trained as scientist, he is a critically thinker, he reads and comprehends the scientific literature, he sees opportunities and, he has good entrepreneurial and business instincts. He’s approachable and interactive. John is genuinely passionate about having Alnylam be The Company to bring RNAi therapeutics to reality.

However, at the risk of sounding trite, I must say that John’s strengths are also his weaknesses. An earlier post called him autocrat. He is more complex than is conveyed by this term alone but, in a lot of ways it’s true. Domineering might be a better word. Two accomplished pharma veterans, Jack Schmidt then Ken Koblan, joined Alnylam to serve ostensibly as CSOs and both departed after less than 18 months at the company. Why? Largely it was due to the fact that John Maragnore was and remains shadow CSO. No one can hold that postion with John there and currently no one does.

This excessive exercise of authoritative control has unfortunate consequences. It predisposes to a management culture of compliance where there is little inclination to disagree with or challenge John. A number of senior people have left. Some suffer and endure it to survive. A few baldly self-serving individuals have slavishly embraced it.

Most disturbingly, Alnylam’s identity has transformed from what might have been termed innovation leader to something more akin to that of a litigious Darwinian capitalist. John once voiced that it was preferable to work with other companies than to fight them . Evidently he has changed his view.

The recent run up in share price has encouraged investors (although it is only half of what it was in 2008) and presented some employees with the opportunity to realize financial gains. In the greater biopharma community around Boston/Cambridge, Alnylam is not viewed with great affection. Almost uniformly the sentiments I’ve heard from multiple industry scientists is that the company is viewed as arrogant.

Why do you think so? There are many ways this could work out for both compnanies. There can be much larger milestone payments, higher royalties, other types of funding,... Of course TKMR would have to agree to it, but there are many other things that could be interesting to TKMR without the need to hand over a lot of cash

I am holding on to my short of ALNY and long of TKMR. My own DD and agree with Dirks view. I think TKMR price could be around 5 dollars even before the court date since the general sentiment appears to be ALNY will settle with TKMR before. Thus, up TKMR and down ALNY. Thanks for all the erudite work on this blog.

Dirk,Any thoughts about Silence Therapeutics now they've raised $8m or so and say they are funded through to 2014 beginning with plans for a phase1B and 2A on ATU027?Are they smoking their own socks when they say they have the best delievery systems and dont need immuno-suppresants like Tekmira?

First of all it's positive for Silence staff that they got the considerable funding. I did not take it for granted. On the negative of this financing, it was done at a huge discount and I expect many of the new shares to be sold asap as they are up now almost 200%.

Yes, they are making a big deal out of the (transient) immune suppression precaution with Tekmira's (leading) systemic RNAi delivery technology. Without as much convincing evidence of clinical efficacy for their delivery tech, they seem to be skipping a step or two in the discussion.

The very end of October. Yeah, you would think that settlement talks are ongoing given that there are only 2 1/2 more months left. The clock is ticking (also from a declining share price point of view).

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